Table of Contents
USAA Family of Funds...................................1
Message from the President.............................2
Investment Review:
USAA Texas Tax-Free Income Fund.................. 4
USAA Texas Tax-Free Money Market Fund............10
Financial Information:
Independent Auditors' Report......................14
Statements of Assets and Liabilities..............15
Portfolios of Investments in Securities:
USAA Texas Tax-Free Income Fund............... 17
USAA Texas Tax-Free Money Market Fund......... 21
Notes to Portfolios of Investments in Securities..24
Statements of Operations..........................25
Statements of Changes in Net Assets...............26
Notes to Financial Statements.....................27
Important Information
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "streamlined." One copy
of each report is sent to each address, rather than to every registered
owner. For many shareholders and their families, this eliminates duplicate
copies, saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA Texas Fund,
managed by USAA Investment Management Company (IMCO). It may be used as sales
literature only when preceded or accompanied by a current prospectus which gives
further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright) 1998, USAA. All rights reserved.
USAA Family of Funds Summary
Fund Minimum
Type/Name Volatility Investment*
CAPITAL APPRECIATION
==============================================================
Aggressive Growth Very high $3,000
Emerging Markets(1) Very high $3,000
USAA First Start Growth Moderate to high $3,000
Gold(1) Very high $3,000
Growth Moderate to high $3,000
Growth & Income Moderate $3,000
International(1) Moderate to high $3,000
S&P 500 Index(2) Moderate $3,000
Science & Technology(5) Very high $3,000
World Growth(1) Moderate to high $3,000
ASSET ALLOCATION
=============================================================
Balanced Strategy(1) Moderate $3,000
Cornerstone Strategy(1) Moderate $3,000
Growth and Tax
Strategy(3) Moderate $3,000
Growth Strategy(1) Moderate to high $3,000
Income Strategy Low to moderate $3,000
INCOME - TAXABLE
=============================================================
GNMA Low to moderate $3,000
Income Moderate $3,000
Income Stock Moderate $3,000
Short-Term Bond Low $3,000
INCOME - TAX EXEMPT
=============================================================
Long-Term(3) Moderate $3,000
Intermediate-Term(3) Low to moderate $3,000
Short-Term(3) Low $3,000
State Bond Income(3)** Moderate $3,000
MONEY MARKET
=============================================================
Money Market(4) Very low $3,000
Tax Exempt
Money Market(3),(4) Very low $3,000
Treasury Money
Market Trust(4) Very low $3,000
State Money
Market(3),(4)** Very low $3,000
=============================================================
(1) Foreign investing is subject to additional risks, which are discussed in
the funds' prospectuses.
(2) S&P 500(Registered Trademark) is a trademark of The McGraw-Hill Companies,
Inc. and has been licensed for use. The Product is not sponsored, sold or
promoted by Standard & Poor's, and Standard & Poor's makes no
representation regarding the advisability of investing in the Product.
(3) Some income may be subject to state or local taxes or the federal
alternative minimum tax.
(4) An investment in a money market fund is neither insured nor guaranteed by
the U.S. Government, and there is no assurance that any of the funds will
be able to maintain a stable net asset value of $1 per share.
(5) This Fund may be more volatile than a fund that diversifies across
many industries.
* The InveStart(Registered Trademark) program is available for investors
without the $3,000 initial investment required to open an IMCO mutual fund
account. A mutual fund account can be opened with no initial investment
if you elect to have monthly automatic investments of at least $50 from a
bank account. InveStart is not available on tax-exempt funds or the S&P
500 Index Fund. The minimum initial investment for IRAs is $250, except
for the $2,000 minimum required for the S&P 500 Index Fund. IRAs are
not available for tax-exempt funds. The Growth and Tax Strategy Fund
is not available as an investment for your IRA because the majority of its
income is tax exempt.
** California, Florida, New York, Texas, and Virginia funds available
to residents only.
Non-deposit investment products are not insured by the FDIC, are not deposits
or other obligations of, or guaranteed by, USAA Federal Savings Bank,
and are subject to investment risks, and may lose value.
For more complete information about the mutual funds managed and distributed
by USAA IMCO, including charges and expenses, please call 1-800-531-8181
for a prospectus. Read it carefully before you invest.
MESSAGE FROM THE PRESIDENT
In the last few years I have turned my attention more and more to the
subject of tax-efficient investing. Though a few fund companies
are beginning to write about this subject, it remains off the beaten
track of mutual fund investing. But I believe it is of great importance.
[PHOTOGRAPH OF PRESIDENT: MICHAEL J.C. ROTH, CFA APPEARS HERE]
Just recently a close friend whom I have advised for years asked me, "Will my
tax bracket be lower when I retire?" I told him, "No. I will not permit that." I
believe that much financial planning makes an invalid assumption that a
retiree's tax bracket will fall substantially when retirement comes. But it is
quite possible for a person whose income is in a high tax bracket to build an
estate that will sustain that bracket upon retirement. If that occurs,
tax-efficient investing can be very important.
For a mutual fund investor that means maximizing potential tax-exempt income and
long-term capital gains. Unfortunately all of the distributions from IRAs,
401(k)s, and variable annuities will be taxed as ordinary income. But a
non-sheltered portfolio of index funds or efficiently run equity portfolios can
be harvested principally as long-term capital gains at a 20% tax rate. And an
accompanying investment in tax-exempt funds may provide the fixed-income buffer
to stock market risk along with the potential for significant tax-exempt
returns. Such a non-sheltered portfolio may be a valuable addition to an
individual's investment plan and may provide valuable assistance while you live
through your retirement.
Much of the attention of financial planners is concentrated on preparing for
retirement. You must not overlook the fact that you have a good possibility of
enjoying decades of reward for your good planning after you retire.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
For more information about mutual funds managed and distributed by USAA IMCO,
including charges and expenses, please call for a prospectus. Read it carefully
before investing.
Investment Review
USAA TEXAS TAX-FREE INCOME FUND
OBJECTIVE: Provide Texas investors with a high level of current interest income
that is exempt from federal income taxes.
TYPES OF INVESTMENTS: Invests primarily in investment grade Texas tax-exempt
securities.
_____________________________________________________________________________
3/31/97 3/31/98
Net Assets $11.2 Million $21.1 Million
Net Asset Value Per Share $10.38 $11.10
=============================================================================
AVERAGE ANNUAL TOTAL RETURNS AND 30-DAY SEC YIELD* AS OF 3/31/98
1 Year Since Inception on 8/1/94 30-Day SEC Yield
13.71% 9.76% 4.70%
_____________________________________________________________________________
* Calculated as prescribed by the Securities and Exchange Commission.
Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No adjustment has
been made for taxes payable by shareholders on their reinvested dividends and
capital gain distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return
and principal value of an investment will fluctuate, and an investor's shares,
when redeemed, may be worth more or less than their original cost.
- -----------------------------------
CUMULATIVE PERFORMANCE COMPARISON
- -----------------------------------
A chart in the form of a line graph appears here, comparing the cumulative
performance of the Texas Tax-Free Income Fund, the Lehman Brothers Municipal
Bond Index and the Lipper Texas Municipal Debt Funds Average. The data
points from the graph are as follows:
USAA Texas-Tax Free Income Fund
Year Amount
- ------- ------
08/01/94 $10,000
08/31/94 $10,036
12/31/94 $ 9,679
06/30/95 $10,840
12/31/95 $11,830
06/30/96 $11,730
12/31/96 $12,452
06/30/97 $12,946
12/31/97 $13,910
03/31/98 $14,087
Lehman Brothers Municipal Bond Index
Year Amount
- -------- ------
08/01/94 $ 0.00
08/31/94 $10,035
12/31/94 $ 9,746
06/30/95 $10,686
12/31/95 $11,447
06/30/96 $11,396
12/31/96 $11,954
06/30/97 $12,336
12/31/97 $13,053
03/31/98 $13,203
Lipper Texas Municipal Debt Funds Average
Year Amount
- ------- ------
08/01/94 $10,000
08/31/94 $10,021
12/31/94 $ 9,712
06/30/95 $10,624
12/31/95 $11,420
06/30/96 $11,283
12/31/96 $11,820
06/30/97 $12,174
12/31/97 $12,873
03/31/98 $13,005
Data Since Inception on 8/1/94 through 3/31/98
The broad-based Lehman Brothers Municipal Bond Index is an unmanaged index that
tracks total return performance for the long-term investment grade tax-exempt
bond market. The Lipper Texas Municipal Debt Funds Average is the average
performance level of all Texas Municipal Debt Funds, as computed by Lipper
Analytical Services, an independent organization that monitors the performance
of mutual funds. All tax-exempt bond funds will find it difficult to
outperform the Lehman Index, since funds have expenses.
Message from the Manager
[Photo of Portfolio Manager, Robert R. Pariseau, CFA, appears here.]
THE ECONOMY
The U.S. economy continues its 8th year of expansion with remarkably few signs
of inflation. The yield on the 30-year U.S. Treasury Bond (the "Long Bond")
fell to a decade low of 5.69% on January 12, 1998. Nevertheless, bond
investors now seem less confident that the weakness in Asia, higher
productivity, El Nino, a relatively tight monetary policy and other factors will
suppress inflationary pressures. Concerns over the robust U.S. economy have been
a recurrent theme for many months now. Currently, investors seem to lack a
consensus regarding the direction of the next interest rate adjustment by the
Federal Open Market Committee (FOMC, or "the Fed"). Personally, I'm more
confident that economic conditions are more akin to the stable prices and real
growth experienced in the 1950s than the high inflation of the 1970s.
YOUR DIVIDEND YIELD
As interest rates have fallen, our sales force has received inquiries from
investors asking whether high coupon(1) bonds will be called away from various
USAA tax-exempt funds. These investors are obviously concerned that their
fund's yield will drop dramatically. The majority of municipal bonds permit
issuers to "call," or redeem, a bond many years before the stated maturity.
Typically, municipal bonds may not be called until after ten years from the
date of issue. An issuer would call, or refinance, a bond for the same
primary reason that a homeowner would refinance a mortgage -- when interest
rates drop sufficiently to more than offset the cost of refinancing.
Let me assure you that I am very conscious of call features. I continually
evaluate the relative market value of various bond coupons and their respective
call dates. For high coupon bonds, I typically hold them as long as possible. If
I sold a higher coupon bond at a large premium (i.e. market value exceeds face
value), the Fund would lose the tax-exempt income stream prematurely. In
addition, the transaction may trigger a federal capital gain tax for our
investors. I consciously manage the Fund to minimize capital gain distributions.
When high coupon bonds are eventually called, typically the impact on the Fund's
distribution yield is quite muted, maybe a few basis points (a basis point is
.01%) for even a very large position of the Fund's highest yielding bond.
(1) A bond's coupon is the fixed amount of interest that is paid annually stated
as a percentage of face value, normally $1000. For example, a 6.5% coupon
pays $65 (6.5% times $1000 = $65) normally in two semiannual payments of
$32.50 for the life of the bond.
PORTFOLIO STRATEGY
I focus primarily on generating maximum tax-exempt income that potentially
should produce the best after-tax total return over a 3-5 year investment
horizon. I do not buy exotic derivatives, nor do I hedge the portfolio with
futures contracts. I have no intention of purchasing municipal bonds that are
subject to the federal alternative minimum tax (AMT) for individuals. In fact,
since inception, the USAA Texas Tax-Free Income Fund has never distributed
income that was subject to the AMT. Of course, I would certainly advise our
shareholders if there were a change in the Federal Tax Code that compels me to
reconsider my position on the AMT. I remain cautious about investing in
municipal lease obligations.
THE MUNICIPAL MARKET
Interest rates have fallen almost the entire fiscal year. The yield on the
30-year U.S. Treasury Bond (the "Long Bond") began the fiscal year at 7.10% and
ended the period at 5.93%. The tone of the municipal bond market is similar
to what I described last September in the Semiannual Report. In general,
the municipal market does not reward an investor for buying bonds much beyond 20
years in maturity, although on occasion I have found some interesting values.
And similar to last fall, I have been buying fewer BBB and A-rated bonds
compared to the past, because of their low yields relative to higher rated
bonds.
YOUR FUND'S PERFORMANCE: #1 IN THE HEART OF TEXAS
I'm very pleased to say that Morningstar recently awarded the Fund "Five Stars"
for the overall and 3-year ratings as of March 31, 1998, overall and among
1,525 funds, in the municipal bond fund category.(2) In addition, the Fund
earned Lipper Analytical Services' Inc. Performance Achievement Certificate
for ranking #1 out of 20 in Lipper's Texas Municipal Debt Fund category for
the 1-year period ended 12/31/97.(3) Average annual total returns for the
1-year period ended 12/31/97 and the 8/1/94 to 12/31/97 period were 11.71%
and 10.09%, respectively. The Fund has ranked #1 in that category for three
consecutive calendar years - 1995, 1996, and 1997.
Past performance is no guarantee of future results.
(2) Morningstar proprietary ratings reflect historical risk-adjusted performance
through March 31, 1998. The ratings are subject to change monthly. Morningstar
ratings are calculated from the Fund's 3-,5-, and 10-year average annual total
returns, as applicable, in excess of 90-day Treasury bill returns with
appropriate fee adjustments, and a risk factor that reflects fund performance
below 90-day Treasury bill returns. There is a 3-year minimum performance
requirement before a fund is rated. Overall rating is a weighted average of a
fund's 3-,5-, and 10-year ratings, as applicable. The top ten percent of the
funds in a rating category receive five stars, and the next 22.5% receive four
stars.
(3) Refer to page 4 for the Lipper Average Definition.
- ---------------------------------------
COMPARISON - 12 MONTH DIVIDEND YIELD
- ---------------------------------------
A chart in the form of a bar graph appears here illustrating the comparison of
the 12 month Dividend Yield of the USAA Texas Tax-Free Income Fund and
the Lipper Texas Municipal Debt Funds Average from 3/31/96 through 3/31/98.
USAA Texas Tax-Free Lipper Texas Municipal
Income Fund Yield Debt Funds Average*
3/31/96 5.52% 5.02%
3/31/97 5.58% 4.98%
3/31/98 5.15% 4.68%
12-month dividend yield is computed by dividing income dividends paid during the
previous 12 months by the latest month-end net asset value adjusted for capital
gains distributions. The graph represents data from 3/31/96 to 3/31/98.
While past performance is no guarantee of future results, the Fund ranked #1 by
Lipper among Texas Municipal Debt Funds for the past 12 months, ending March 31,
1998, with a total return(4) of 13.71% as compared to the average of 10.35% for
the 20 funds in the category. For the same period and category, the Fund's
dividend distribution yield(5) was 5.15% as compared to the Lipper Average
of 4.68%. Your Fund's net asset value per share increased by $.72, or
6.9%, since March 31, 1997, adjusting for the $.0479 and $.0471 capital
gains distributed on May 14, 1997, and December 30, 1997, respectively.
* Refer to Page 4 for the Lipper Average Definition.
(4) Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions.
(5) 12-month dividend yield is computed by dividing income dividends paid during
the previous 12 months by the latest month-end net asset value adjusted for
capital gains distributions.
THE STATE OF TEXAS
A warm weather environment, favorable tax rates, and a young labor force have
made the state attractive for relocating businesses. During this decade, Texas
has added more jobs than any other state. The state's close ties to Mexico's
markets enhance international trade. Texas remains the second most populous
state, behind only California, having grown nearly twice as fast as the nation
at large since 1990. Reflecting strong credit fundamentals, Texas maintain high
bond ratings of Aa2, AA+, and AA from Moody's Investors Service, Standard &
Poor's, and Fitch IBCA, respectively.
The Texas economy has diversified away from the resource based economy of the
1980s to a structure similar to the rest of the U.S. For example, in the first
half of the 1990s, Texas gained more high tech jobs than any other state.
Texas is now second only to California in total high technology employment.
Making good on a promise, the legislature has passed a $200 million program
to fund a school construction program that favors the poorest districts.
In addition, the legislature is studying possible solutions for the growing
water shortages in some regions. We will closely monitor these and other issues
that might impact your Fund's holdings.
The table below compares the yield of the USAA Texas Tax-Free Income Fund with
a taxable equivalent investment.
To match the USAA Texas Tax-Free Income Fund's closing
30-Day SEC yield of 4.70% and:
______________________________________________________________________________
Assuming a Marginal Federal Tax Rate of: 28% 31% 36% 39.6%
- ------------------------------------------------------------------------------
A fully Taxable Investment must pay: 6.53% 6.81% 7.34% 7.78%
______________________________________________________________________________
This table is based on a hypothetical investment calculated for illustrative
purposes only. It is not an indication of performance for any of the USAA
Family of Funds.
---------------------
PORTFOLIO RATINGS/MIX
MARCH 31, 1998
---------------------
A pie chart is shown here depicting the Portfolio Mix as of March 31, 1998 of
the USAA Texas Tax-Free Income Fund to be:
Cash Equivalent - 4%, A - 11%, AA - 13%, BBB - 37%, AAA - 35%
This chart reflects the highest rating of either Moody's Investors Service,
Standard & Poor's Rating Group, or Fitch Investors Service. Unrated securities
that have been determined by USAA IMCO to be of equivalent investment quality to
categories AAA and BBB account for .8% and 2.8%, respectively, of the Fund's
investments.
Note: Income may be subject to the federal alternative minimum tax.
See page 17 for a complete listing of the Portfolio of Investments in
Securities.
Investment Review
USAA TEXAS TAX-FREE MONEY MARKET FUND
OBJECTIVE: Provide Texas investors with a high level of current interest income
that is exempt from federal income, while preserving capital and maintaining
liquidity.
TYPES OF INVESTMENTS: High quality Texas tax-exempt securities with maturities
of 397 days or less. The Fund will maintain a dollar-weighted average portfolio
maturity of 90 days or less and will endeavor to maintain a constant net asset
value per share of $1.00.*
* An investment in this Fund is neither insured nor guaranteed by the U.S.
Government, and there can be no assurance that the Fund will maintain a stable
net asset value of $1.00 per share.
____________________________________________________________________________
3/31/97 3/31/98
Net Assets $5.3 Million $5.9 Million
Net Asset Value Per Share $1.00 $1.00
=============================================================================
AVERAGE ANNUAL TOTAL RETURNS AND 7-DAY SIMPLE YIELD AS OF 3/31/98
- -----------------------------------------------------------------------------
1 Year Since Inception on 8/1/94 7-Day Simple Yield
3.43% 3.33% 3.37%
_____________________________________________________________________________
Total return equals income return and assumes reinvestment of all dividends and
any capital gain distributions. No adjustment has been made for taxes payable by
shareholders on their reinvested dividends and capital gain distributions. Past
performance is no guarantee of future results. Yields and returns fluctuate. The
7-day yield quotation more closely reflects current earnings of the Fund than
the total return quotation.
------------------------
7-DAY YIELD COMPARISON
------------------------
A chart in the form of a line graph appears here illustrating the comparison of
the 7-day yield of the USAA Texas Tax-Free Money Market Fund to the 7-Day Yield
of the IBC Financial Data, Inc. State Specific SB & GP Money Funds from 3/97
through 3/98.
USAA Texas IBC Financial
Money Market Data, Inc.
------------ --------------
3/97 2.98% 2.7%
4/97 3.96% 3.48%
5/97 3.58% 3.24%
6/97 3.77% 3.27%
7/97 3.4% 3.02%
8/97 3.15% 2.79%
9/97 3.7% 3.25%
10/97 3.37% 3.03%
11/97 3.79% 3.2%
12/97 3.67% 3.27%
1/98 3.16% 2.82%
2/98 2.99% 2.66%
3/98 3.34%* 2.93%*
Data represent the last Monday of each month.
*Ending date 3/30/98
The graph tracks the Fund's 7-day simple yield against IBC Financial Data,
Inc. State Specific SB (Stock Broker) & GP (General Purpose) (Tax-Free) Money
Funds, an average of money market fund yields.
Message from the Manager
[Photo of Portfolio Manager, John C. Bonnell, CFA, appears here.]
THE MARKET
How long can the economy continue to expand? How long can inflation stay low
despite rising wages and falling unemployment? To what extent will Asian
economic problems affect our economy? Who knows!
It certainly would be nice to have the foresight to answer the above questions,
but even with the correct answers, one would not know whether to lock in one
year rates or invest in shorter term securities. As mentioned in the last
semiannual report, the short-term municipal market is primarily driven
by supply and demand relationships.
The Federal Reserve (Fed) increased the federal funds rate (the rate banks
charge one another for overnight loans) .25% in March 1997. The Fed has been on
hold since then. For the last twelve months, one year treasury bill yields
generally declined within a range of 6.07% to 5.08%, and ended March 1998 at
5.39%. During the same period, yields on municipal notes as measured by the Bond
Buyer's One-Year Note Index,(1) ranged from 3.97% to 3.51%, and ended March 1998
at 3.64%. Supply and demand factors caused a spike up in yield at the end of the
calendar year. Yields were low during the first three months of 1998 as the
market experienced large cash inflows (which increased demand) during a period
of little new supply. How long will this continue? Again, no one really knows.
However certain seasonal factors and corporate buying habits are more
predictable and should produce buying opportunities to lock in higher yields.
(1) Bond Buyer Index is the industry standard for yields of investment grade
municipal bonds.
STRATEGY
Your Fund strives to meet its objective in any prevailing market environment.
Rather than trying to predict future interest rates, we focus on buying the best
relative value in the market at any given time. This reflects our longstanding
commitment to credit research, and a judgment as to whether the Fund would
be sufficiently compensated with additional yield to invest in longer term
securities. Because of the lack of supply during the first three months of 1998
(and low yields on what was available), your Fund's average maturity is
relatively short. This will provide the liquidity necessary to take advantage
of higher yields during the coming months as opportunities arise.
PERFORMANCE
While past performance is no guarantee of future results, for the 12 months
ending March 31, 1998, your Fund ranked 5 out of 156 State Specific Tax-Exempt
Money Market Funds according to IBC Financial Data, Inc.(2) with a compounded
dividend yield of 3.43%. The average for the category over the same period was
3.04%.
TEXAS
The Texas economy continues to perform well, adding jobs and increasing the
Gross State Product (GSP) at a steady pace. Employment growth of 2.73% in 1997
continues to outpace the national average of 2.20%, but at slower rates than in
previous years. Output as measured by GSP increased 4.2% in 1997. The benefits
of economic diversification are evident as Texas moved away from the
resource-based economy of the 1980s to an economy with similar characteristics
to the rest of the U.S. Unlike the 1980s, the Texas economy is still very strong
despite the significant decline in oil prices over the last twelve months. A
moderate climate, favorable tax rates, close proximity to Mexico, and an
abundant labor force combine to make Texas attractive for businesses.
The state budget, with its reliance on the cyclically sensitive sales tax, has
benefited from consistent economic growth. For the fiscal year ending 8/31/97,
the state ended with a $2.7 billion positive cash balance in the General Revenue
Fund (the state's main operating fund). Given the positive economic outlook for
Texas and prudent fiscal management, we would expect the state to maintain a
strong financial position. We continue to analyze each issue on a case by case
basis and remain very selective when investing fund assets.
(2) IBC Financial Data, Inc. provides independent analysis of trends in the
financial services and investing industries, with particular concentration
on money market funds.
-----------------------------------
CUMULATIVE PERFORMANCE OF $10,000
-----------------------------------
A chart in the form of a line graph appears here, illustrating the cumulative
performance of a $10,000 Investment in the Texas Tax-Free Money Market Fund.
The data points from the graph are as follows:
8/1/94 $10,000
8/94 $10,021
12/94 $10,122
06/95 $10,306
12/95 $10,483
6/96 $10,651
12/96 $10,824
06/97 $11,003
12/97 $11,195
3/31/98 $11,280
Data since inception on 8/1/94 through 3/31/98
Past performance is no guarantee of future results and the value of your
investment will vary according to the fund's performance. Income may be subject
to federal, state or local taxes, or to the alternative minimum tax. For 7-day
yield information, please refer to the Fund's Investment Review page.
An investment in this Fund is neither insured nor guaranteed by the U.S.
Government and there is no assurance that the Fund will maintain a stable net
asset value of $1 per share.
See page 21 for a complete listing of the Portfolio of Investments in
Securities.
Independent Auditors' Report
The Shareholders and Board of Trustees
USAA STATE TAX-FREE TRUST:
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments in securities, of the USAA Texas Tax-Free Income
and USAA Texas Tax-Free Money Market Funds, portfolios of the USAA State
Tax-Free Trust as of March 31, 1998, and the related statements of operations
for the year then ended, the statements of changes in net assets for each of
the years in the two-year period then ended, and financial highlights presented
in note 7 to the financial statements for each of the years or periods in the
four-year period then ended. These financial statements and financial
highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of March 31, 1998, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
USAA Texas Tax-Free Income and USAA Texas Tax-Free Money Market Funds,
portfolios of the USAA State Tax-Free Trust as of March 31, 1998, the results of
their operations for the year then ended, the changes in their net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years or periods in the four-year period then ended,
in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas
May 8, 1998
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
March 31, 1998
<TABLE>
<CAPTION>
USAA USAA
Texas Texas Tax-Free
Tax-Free Money Market
Income Fund Fund
----------- ------------
<S> <C> <C>
ASSETS
Investments in securities, at market value
(identified cost of $19,982 and $5,849, respectively) $ 21,218 $ 5,849
Cash 5 25
Receivables:
Capital shares sold 217 7
Interest 228 30
------ ------
Total assets 21,668 5,911
------ ------
LIABILITIES
Securities purchased 488 -
Capital shares redeemed 31 12
USAA Investment Management Company 3 -
USAA Transfer Agency Company 1 -
Accounts payable and accrued expenses 13 10
Dividends on capital shares 16 1
------ -------
Total liabilities 552 23
------- -------
Net assets applicable to capital shares outstanding $ 21,116 $ 5,888
====== ======
REPRESENTED BY:
Paid-in capital $ 19,843 $ 5,888
Accumulated net realized gain on investments 37 -
Net unrealized appreciation of investments 1,236 -
------ --------
Net assets applicable to capital shares outstanding $ 21,116 $ 5,888
====== =======
Capital shares outstanding, unlimited number of shares
authorized, $.001 par value 1,902 5,888
====== =======
Net asset value, redemption price, and offering
price per share $ 11.10 $ 1.00
====== ========
See accompanying notes to financial statements.
</TABLE>
CATEGORIES & DEFINITIONS
PORTFOLIOS OF INVESTMENTS IN SECURITIES
March 31, 1998
Fixed-Rate Instruments - consist of municipal bonds, notes, and commercial
paper. The interest rate is constant to maturity. Prior to maturity, the price
of a fixed-rate instrument generally varies inversely to the movement of
interest rates.
Variable Rate Demand Notes (VRDN) - provide the right, on any business day, to
sell the security at face value on either that day or in seven days. The
interest rate is adjusted at a stipulated daily, weekly, or monthly interval to
a rate that reflects current market conditions. In money market funds, the
effective maturity is the date on which the underlying principal amount may be
recovered or the next rate adjustment date consistent with regulatory
requirements. In bond funds, the effective maturity is the next put date. Most
VRDNs possess a credit enhancement.
Credit Enhancement (CRE) - adds the financial strength of the provider of the
enhancement to support the issuer's ability to repay the principal when due. The
enhancement may be provided by either a high quality bank, insurance company, or
other corporation, or a collateral trust. Typically, the rating agencies
evaluate the security based upon the credit standing of the provider of the
credit enhancement, rather than the credit standing of the issuer. If the
securities are enhanced by a bond insurer, scheduled principal and interest
payments are insured by:
(1) Municipal Bond Insurance Association.
(2) AMBAC Indemnity Corp.
(3) Financial Guaranty Insurance Co.
(4) Financial Security Assurance, Inc.
(5) American Capital Access.
(6) Texas Permanent School Fund.
The insurance does not guarantee the market value of the municipal bonds.
PORTFOLIO DESCRIPTION ABBREVIATIONS
COP Certificate of Participation
CRE Credit Enhanced
GO General Obligation
IDA Industrial Development
Authority/Agency
IDC Industrial Development
Corporation
IDRB Industrial Development
Revenue Bond
ISD Independent School District
MFH Multi-Family Housing
PCRB Pollution Control Revenue Bond
RB Revenue Bond
USAA TEXAS TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES
(IN THOUSANDS)
March 31, 1998
Principal Coupon Final Market
Amount Security Rate Maturity Value
- -------- -------- ----- -------- ------
FIXED RATE INSTRUMENTS (96.2%)
Texas (91.0%)
$ 200 Austin Community College District RB,
Series 1995 (CRE) 1 6.10% 2/01/15 $ 213
500 Bexar County Health Facilities
Development Corp. RB,
Series 1997B (CRE) 1 5.25 11/15/31 498
200 Bexar County Health Facilities
Development Corp. Refunding RB,
Series 1997A (CRE) 1 5.25 11/15/27 200
250 Bexar Metropolitan Water District RB,
Series 1995 (CRE) 1 5.88 5/01/22 266
500 Brazos County Health Facilities RB,
Series 1993B 6.00 1/01/19 520
1,000 Cedar Hill ISD GO,
Series 1996 (CRE) 6, b 6.30 8/15/15 386
150 Coastal Water Auth. Contract RB,
Series 1995 (CRE) 4 5.95 12/15/25 159
500 Denison Hospital Auth. RB,
Series 1997 d 6.13 8/15/27 528
195 Department of Housing and
Community Affairs RB, Series 1991A 6.95 7/01/23 210
300 Guadalupe-Blanco River Auth. IDC RB,
Series 1982A 6.35 7/01/22 326
300 Harlingen Higher Education Facilities
Corp. RB, Series 1995 d 6.38 8/15/15 316
Harris County Health Facilities RB,
200 Series 1991A d 6.75 2/15/21 220
150 Series 1992 a 7.13 6/01/15 170
400 Harris County IDC RB,
Series 1992 d 6.95 2/01/22 435
600 Harrison County Health Facilities
Development Corp. RB,
Series 1998 (CRE) 5 5.50 1/01/18 606
100 Health Facilities Development Corp.
RB, Series 1993B (CRE) 1 6.38 8/15/23 110
75 Housing Agency Single-Family
Mortgage RB, Series 1991A 7.15 9/01/12 80
Houston Water and Sewer System RB,
150 Series 1992B 6.38 12/01/14 163
350 Series 1997C (CRE) 3 5.25 12/01/22 351
500 Lower Neches Valley Auth. IDC RB,
Series 1997 5.80 5/01/22 530
400 Matagorda County Navigation District
PCRB, Series 1993 6.00 7/01/28 420
1,500 Mesquite Health Facilities Development
Corp. RB, Series 1996A 6.40 2/15/20 1,612
500 Midland County Hospital District RB,
Series 1997 (CRE) 2 5.38 6/01/16 507
1,500 Montgomery County Refunding Bonds,
Series 1997 (CRE) 1, b 5.60 3/01/16 582
North Central Health Facilities
Development Corp. RB,
300 Series 1993 a 5.90 6/01/21 327
400 Series 1996 6.30 2/15/15 429
500 Series 1998 c 5.38 2/15/25 491
Northeast Hospital Auth. RB,
400 Series 1993B a, d 7.25 7/01/22 458
700 Series 1997 (CRE) 4, d 5.63 5/15/22 728
800 Nueces River Auth. PCRB,
Series 1998 5.60 1/01/27 822
800 Orange County Navigation and
Port District IDC RB,
Series 1996 d 6.38 2/01/17 877
Pantego GO,
60 Series 1994 7.75 2/15/14 68
65 Series 1994 7.75 2/15/15 74
1,400 Port of Corpus Christi IDC PCRB,
Series 1997A 5.45 4/01/27 1,406
150 Sabine River Auth. PCRB,
Series 1992 (CRE) 3 6.55 10/01/22 165
San Antonio Electric and Gas RB,
80 Series 1989 a 6.50 2/01/12 83
120 Series 1989 6.50 2/01/12 124
300 Series 1992 5.00 2/01/17 295
150 Tarrant County Health Facilities
Development Corp. RB, Series 1994 6.00 9/01/24 164
Turnpike Auth. Dallas North Tollway RB,
150 Series 1994 (CRE) 3, a 6.75 1/01/15 174
350 Series 1995 (CRE) 3 5.25 1/01/23 350
Tyler Health Facilities Development
Corp. Hospital RB,
270 Series 1993B 6.63 11/01/11 288
135 Series 1993B 6.75 11/01/25 145
680 Series 1997A 5.63 7/01/13 685
200 Water Development Board GO,
Series 1994 7.00 8/01/20 227
1,410 Waxahachie ISD GO,
Series 1997 (CRE) 6, b 5.50 8/15/15 574
265 Weimar ISD GO, Series 1997
(CRE) 6, b 5.60 8/15/16 102
Wylie ISD GO,
1,100 Series 1998 (CRE) 6, b 5.33 8/15/16 416
1,500 Series 1998 (CRE) 6, b 5.45 8/15/25 341
Puerto Rico (5.2%)
600 Electric Power Auth. RB,
Series 1995Z 5.25 7/01/21 596
475 Highway Auth. RB, Series Q 6.00 7/01/20 496
-----
Total fixed rate instruments
(cost: $19,077) 20,313
------
VARIABLE RATE DEMAND NOTES (4.3%)
Texas
500 Nueces River Auth. PCRB,
Series 1985 (CRE) 3.90 12/01/99 500
405 Port Arthur Navigation District IDC PCRB,
Series 1985 (CRE) 4.00 5/01/03 405
-----
Total variable rate demand notes (cost: $905) 905
-----
Total investments (cost: $19,982) $21,218
=========
PORTFOLIO SUMMARY BY INDUSTRY
-----------------------------
Hospitals 22.8%
General Obligations 13.1
Nursing/Continuing Care Centers 12.0
Escrowed Bonds 7.5
Oil & Gas - Refining/Manufacturing 6.7
Electric/Gas Utilities- Municipal 4.8
Water/Sewer Utilities - Municipal 4.4
Agricultural Products 4.2
Metals/Mining 3.9
Electric Utilities 2.8
Oil - International Integrated 2.5
Education 2.5
Aluminum 2.4
Special Assessment/Tax/Fee 2.3
Leasing 2.1
Oil & Gas - Exploration & Production 1.9
Toll Roads 1.7
Chemicals 1.5
Single-Family Housing 1.4
---------
Total 100.5%
=========
USAA TEXAS TAX FREE MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES
(IN THOUSANDS)
MARCH 31, 1998
<TABLE>
<CAPTION>
Principal Coupon Final
Amount Security Rate Maturity Value
- -------- ---------- -------- -------- ------
VARIABLE RATE DEMAND NOTES (86.7%)
<C> <S> <C> <C> <C>
Texas
$ 260 Amarillo Health Facilities Corp. RB,
Series 1985 (CRE) 3.85% 5/31/25 $ 260
270 Arlington IDC RB, Series 1985 (CRE) 3.95 10/01/20 270
200 Austin Higher Education Auth. RB,
Series 1995 (CRE) 3.75 8/01/19 200
200 Boatmen's St. Louis Grantor Trust COP,
Series 1996A (CRE) 3.90 6/30/01 200
200 Comal County Health Facilities
Development Corp. RB,
Series 1997 (CRE) 3.70 2/01/27 200
100 Euless IDA RB, Series 1985 (CRE) 3.65 12/01/15 100
225 Garland IDA PCRB 3.80 12/01/05 225
100 Guadalupe-Blanco River Auth. IDRB,
Series 1993 (CRE) 3.65 6/01/02 100
200 Gulf Coast IDA RB, Series 1989 (CRE) 3.75 11/01/19 200
260 Matagorda County Hospital District RB,
Series 1988 (CRE) 3.95 8/01/18 260
100 Maverick County IDC RB,
Series 1991 (CRE) 3.75 12/01/01 100
260 Metropolitan Higher Education Auth. RB,
Series 1984 (CRE) 4.25 12/01/04 260
100 North Central Health Facilities
Development Corp. RB,
Series 1989 (CRE) 3.75 12/01/98 100
490 North Central IDA RB, Series 1983 3.85 10/01/13 490
180 Nueces River Auth. PCRB,
Series 1985 (CRE) 3.90 12/01/99 180
285 Port Arthur Navigation District IDC PCRB,
Series 1985 (CRE) 4.00 5/01/03 285
200 Port Development Corp. RB,
Series 1984 (CRE) 3.90 12/01/04 200
200 Sherman Higher Education
Finance Corp. RB, Series 1997 (CRE) 3.75 1/01/18 200
Tarrant County Housing Finance
Corp. MFH RB,
200 Series 1985 (CRE) 3.75 12/01/25 200
875 Series 1994 (CRE) 3.90 11/01/07 875
100 Trinity River IDA RB, Series 1994 (CRE) 3.78 11/01/14 100
100 Victoria Health Facilities
Development Corp. RB,
Series 1997 (CRE) 3.70 9/01/27 100
-------
Total variable rate demand notes (cost: $5,105) 5,105
-------
FIXED RATE INSTRUMENTS (12.6%)
Texas
185 Carrollton GO, Series 1997 (CRE) 1 5.80 8/15/98 186
140 Dallas Waterworks and Sewer
Systems RB, Series 1994 8.20 4/01/98 140
125 Galveston County Municipal Utility District
Waterworks and Sewer System RB,
Series 1997 (CRE) 2 5.60 8/01/98 126
65 Godley ISD Unlimited Tax Bonds,
Series 1997 (CRE) 6 6.00 8/15/98 66
80 Hempstead Tax and Revenue Certificates
of Obligation, Series 1994 (CRE) 1 7.00 6/01/98 80
25 Jefferson County Drainage GO,
Series 1989 (CRE) 2 6.75 5/01/98 25
45 McAllen ISD School Bonds,
Series 1998 (CRE) 6 6.25 2/15/99 46
15 Socorro ISD GO,
Series 1986 (CRE) 3 7.55 9/01/98 15
60 Woodlands Road Utility District GO,
Series 1997 (CRE) 4 4.80 10/01/98 60
-------
Total fixed rate instruments (cost: $744) 744
-------
Total investments (cost: $5,849) $ 5,849
========
</TABLE>
PORTFOLIO SUMMARY BY INDUSTRY
------------------------------
Multi-Family Housing 18.3%
Manufacturing - Diversified Industries 12.1
Education 11.2
General Obligations 8.1
Hospitals 7.8
Airport/Port 6.8
Water/Sewer Utilities -Municipal 6.2
Healthcare - Miscellaneous 6.1
Oil & Gas - Exploration & Production 4.8
Publishing/Newspapers 4.6
Buildings 3.4
Aluminum 3.1
Building Material Group 1.7
Lodging/Hotel 1.7
Nursing/Continuing Care Centers 1.7
Retail - Specialty 1.7
---------
Total 99.3%
==========
NOTES TO PORTFOLIOS OF INVESTMENTS IN SECURITIES
March 31, 1998
GENERAL NOTES
Values of securities are determined by procedures and practices discussed in
note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the
same as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net
assets.
SPECIFIC NOTES
(a) Prerefunded to various dates prior to maturity at the call price.
(b) Zero Coupon security. Rate represents the effective yield at date of
purchase. For the USAA Texas Tax-Free Income Fund these securities represent
11.4% of the Fund's net assets.
(c) At March 31, 1998, the cost of securities purchased on a delayed delivery
basis for the USAA Texas Tax-Free Income Fund was $.5 million.
(d) At March 31, 1998, these securities were segregated to cover delayed
delivery purchases.
See accompanying notes to financial statements.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Year ended March 31, 1998
<TABLE>
<CAPTION>
USAA USAA
Texas Texas Tax-Free
Tax-Free Money Market
Income Fund Fund
------------ -----------
<S> <C> <C>
Net investment income:
Interest income $ 885 $ 213
----- -----
Expenses:
Management fees 77 28
Transfer agent's fees 15 7
Custodian's fees 32 18
Postage 1 1
Shareholder reporting fees 2 1
Trustees' fees 7 7
Registration fees 3 -
Professional fees 11 11
Other 3 2
------ ----
Total expenses before reimbursement 151 75
Expenses reimbursed (74) (48)
------ -----
Total expenses after reimbursement 77 27
------ -----
Net investment income 808 186
------ -----
Net realized and unrealized gain on investments:
Net realized gain 112 -
Change in net unrealized appreciation/depreciation 959 -
------ -----
Net realized and unrealized gain 1,071 -
------ -----
Increase in net assets resulting from operations $ 1,879 $ 186
====== =====
See accompanying notes to financial statements.
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended March 31,
<TABLE>
<CAPTION>
USAA USAA
Texas Tax-Free Texas Tax-Free
Income Funds Money Market Fund
-------------------------------------------
1998 1997 1998 1997
-------------------------------------------
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 808 $ 535 $ 186 $ 162
Net realized gain on investments 112 54 - -
Change in net unrealized appreciation/
depreciation of investments 959 38 - -
----- ---- ---- ----
Increase in net assets resulting
from operations 1,879 627 186 162
----- ---- --- ----
Distributions to shareholders from:
Net investment income (808) (535) (186) (162)
------- ---- ---- -----
Net realized gains (129) (160) - -
------- ----- ---- -----
From capital share transactions:
Proceeds from shares sold 9,743 4,063 10,140 6,602
Dividend reinvestments 781 583 166 93
Cost of shares redeemed (1,556) (1,425) (9,698) (6,110)
------ ------ ----- -----
Increase in net assets from
capital share transactions 8,968 3,221 608 585
------ ------ ----- -----
Net increase in net assets 9,910 3,153 608 585
Net assets:
Beginning of period 11,206 8,053 5,280 4,695
------ ----- ------ -----
End of period $21,116 $11,206 $5,888 $5,280
======= ====== ===== =====
Change in shares outstanding:
Shares sold 894 390 10,140 6,602
Shares issued for dividends reinvested 72 56 166 93
Shares redeemed (144) (137) (9,698) (6,110)
-------- ------ -------- ------
Increase in shares outstanding 822 309 608 585
======== ====== ====== ======
See accompanying notes to financial statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA State Tax-Free Trust (the Trust), registered under the Investment Company
Act of 1940, as amended, is a diversified, open-end management investment
company organized as a Delaware business trust consisting of four separate
funds. The information presented in this annual report pertains only to the USAA
Texas Tax-Free Income Fund and USAA Texas Tax-Free Money Market Fund (the
Funds). The Funds have a common objective of providing Texas investors with a
high level of current interest income that is exempt from federal income taxes.
The USAA Texas Tax-Free Money Market Fund has a further objective of preserving
capital and maintaining liquidity.
A. Security valuation - Investments in the USAA Texas Tax-Free Income Fund are
valued each business day by a pricing service (the Service) approved by the
Trust's Board of Trustees. The Service uses the mean between quoted bid and
asked prices or the last sale price to price securities when, in the Service's
judgement, these prices are readily available and are representative of the
securities' market values. For many securities, such prices are not readily
available. The Service generally prices these securities based on methods which
include consideration of yields or prices of municipal securities of comparable
quality, coupon, maturity and type, indications as to values from dealers in
securities, and general market conditions. Securities which are not valued by
the Service, and all other assets, are valued in good faith at fair value using
methods determined by the Manager under the general supervision of the Board of
Trustees. Securities purchased with maturities of 60 days or less and, pursuant
to Rule 2a-7 of the Investment Company Act of 1940, as amended, all securities
in the USAA Texas Tax-Free Money Market Fund, are stated at amortized cost
which approximates market value.
B. Federal taxes - Each Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from
sales of investment securities is computed on the identified cost basis.
Interest income is recorded daily on the accrual basis. Premiums and original
issue discounts are amortized over the life of the respective securities.
Market discounts are not amortized. Any ordinary income related to market
discounts is recognized upon disposition of the securities. The Funds
concentrate their investments in Texas municipal securities and therefore
may be exposed to more credit risk than portfolios with a broader geographical
diversification.
D. Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that may affect the reported amounts in the financial
statements.
(2) LINES OF CREDIT
The Funds participate with other USAA funds in two joint short-term revolving
loan agreements totaling $850 million, one with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($750 million uncommitted), and one with
NationsBank of Texas, N.A. ($100 million committed). The purpose of the
agreements is to meet temporary or emergency cash needs, including redemption
requests that might otherwise require the untimely disposition of securities.
Subject to availability under its agreement with CAPCO, each Fund may borrow
from CAPCO an amount up to 5% of its total assets at CAPCO's borrowing rate with
no markup. Subject to availability under its agreement with NationsBank, each
Fund may borrow from NationsBank an amount which, when added to outstanding
borrowings under the CAPCO agreement, does not exceed 15% of its total assets at
NationsBank's borrowing rate plus a markup. The Funds had no borrowings under
either of these agreements during the year ended March 31, 1998.
(3) DISTRIBUTIONS
Net investment income is accrued daily as dividends and distributed to
shareholders monthly. Distributions of realized gains from security transactions
not offset by capital losses are made in the succeeding fiscal year or as
otherwise required to avoid the payment of federal taxes.
The Funds completed their fiscal year on March 31, 1998. Federal law (Internal
Revenue Code of 1986, as amended, and the regulations thereunder) requires each
Fund to notify its shareholders after the close of its taxable year as to what
portion of its earnings was exempt from federal taxation and dividend
distributions which represent long-term capital gains. The net investment income
earned and distributed by each of the Funds was 100% tax exempt for federal
income tax purposes. There were no long-term capital gain distributions for the
year ended March 31, 1998.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities for the year
ended March 31, 1998 were as follows:
USAA Texas Tax-Free USAA Texas Tax-Free
Income Fund Money Market Fund
($000) ($000)
-----------------------------------------
Purchases $16,934 $16,587
Sales/maturities $ 8,533 $15,235
For the USAA Texas Tax-Free Income Fund, cost of purchases and proceeds from
sales/maturities excludes short-term securities.
Gross unrealized appreciation and depreciation of investments at March 31, 1998
was as follows:
Appreciation Depreciation Net
($000) ($000) (000)
-------------------------------------------------
USAA Texas Tax-Free
Income Fund $ 1,240 $ 4 $1,236
(5) TRANSACTIONS WITH MANAGER
A. Management fees - The investment policies of the Funds and the management of
the Funds' portfolios are carried out by USAA Investment Management Company (the
Manager). Management fees are computed as a percentage of aggregate average net
assets (ANA) of both Funds combined, which on an annual basis is equal to .50%
of the first $50 million, .40% of that portion over $50 million but not over
$100 million, and .30% of that portion over $100 million. These fees are
allocated on a proportional basis to each Fund monthly based upon ANA.
The Manager has voluntarily agreed to limit the annual expenses of each Fund to
.50% of its average net assets through August 1, 1999.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services, an affiliate of the Manager, provides transfer agent services
to the Funds based on an annual charge of $26 per shareholder account plus
out-of-pocket expenses.
C. Underwriting services - The Manager provides exclusive underwriting and
distribution of the Funds' shares on a continuing best efforts basis. The
Manager receives no commissions or fees for this service.
(6) TRANSACTIONS WITH AFFILIATES
Certain trustees and officers of the Funds are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Funds.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USAA TEXAS TAX-FREE INCOME FUND
March 31, 1998
(7) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
Year Ended March 31,
----------------------------------------------
1998 1997 1996 1995**
----------------------------------------------
Net asset value at
beginning of period $ 10.38 $10.45 $ 10.21 $ 10.00
Net investment income .57 .59 .58 .34
Net realized and
unrealized gain .82 .13 .36 .21
Distributions from net
investment income (.57) (.59) (.58) (.34)
Distributions of realized
capital gains (.10) (.20) (.12) -
------- ------- -------- -------
Net asset value at
end of period $ 11.10 $10.38 $ 10.45 $ 10.21
======= ======= ======== =======
Total return (%) * 13.71 7.06 9.42 5.75
Net assets at end
of period (000) $21,116 $11,206 $ 8,053 $ 6,446
Ratio of expenses to
average net assets (%) .50 .50 .50 .50a
Ratio of expenses to
average net
assets excluding
reimbursements (%) .98 1.35 1.66 2.40a
Ratio of net investment
income to average
net assets (%) 5.27 5.63 5.51 5.56a
Portfolio turnover (%) 56.29 86.17 71.14 49.63
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income and capital gain
distributions during the period.
** Fund commenced operations August 1, 1994.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USAA TEXAS TAX-FREE MONEY MARKET FUND
March 31, 1998
(7) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
Year Ended March 31,
------------------------------------------
1998 1997 1996 1995**
------------------------------------------
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .03 .03 .03 .02
Distributions from net
investment income (.03) (.03) (.03) (.02)
------ ------- ------ ------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ======== ======= ======
Total return (%) * 3.43 3.22 3.49 2.09
Net assets at end
of period (000) $ 5,888 $5,280 $ 4,695 $ 3,881
Ratio of expenses to
average net assets (%) .50 .50 .50 .50a
Ratio of expenses to
average net
assets excluding
reimbursements (%) 1.37 1.77 2.02 2.63a
Ratio of net investment
income to average
net assets (%) 3.38 3.17 3.42 3.18a
(a)Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income distributions during the period.
**Fund commenced operations August 1, 1994.
Directors
Robert G. Davis, Chairman of the Board
Michael J.C. Roth, President and Vice Chairman of the Board
John W. Saunders, Jr., Vice President
Barbara B. Dreeben
Howard L. Freeman, Jr.
Robert L. Mason
Richard A. Zucker
Investment Adviser, Underwriter and Distributor
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
Transfer Agent
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
Custodian
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
Legal Counsel
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
Independent Auditors
KPMG Peat Marwick LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
Telephone Assistance
Call toll free - Central Time
Monday - Friday 8:00 a.m. to 8:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
For Additional Information On Mutual Funds
1-800-531-8181, (in San Antonio) 456-7211
For account servicing, exchanges or redemptions
1-800-531-8448, (in San Antonio) 456-7202
Recorded Mutual Fund Price Quotes
24-Hour Service (from any phone)
1-800-531-8066, (in San Antonio) 498-8066
Mutual Fund Touchline(Registered Trademark)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
================================================================================
